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ChainChronicles

In-depth analysis of the history and development of the blockchain field

    • Cryptocurrency

    Crypto Industry Urges Congressional Action to Block New DeFi Broker Rules

    Chainchronicles Posted on

    The United States Internal Revenue Service (IRS) has recently disclosed new regulations that classify several decentralized finance (DeFi) protocols as brokers. This move has sparked an immediate backlash within the crypto industry, with many calling for the incoming Congress to overturn these new rules.

    Impact of New Regulations on DeFi Protocols

    The new regulations treat front-end protocols facilitating digital asset transactions as brokers, requiring Know Your Customer (KYC) disclosures of transactions. According to the IRS, these regulations will affect up to 875 DeFi brokers. This has raised concerns among industry experts and stakeholders about the implications for DeFi protocols.

    Industry Experts Weigh in on the New Regulations

    Jake Chervinsky, chief legal officer at venture capital firm Variant, stated that "This unlawful rule is the dying gasp of the anti-crypto army on its way out of power. It must be struck down, either by the courts or the incoming administration." This sentiment was echoed by Alexander Grieve, vice-president of government affairs at venture firm Paradigm, who said: "The new pro-crypto Congress can, and should, roll these back via the CRA process next year."

    What is the Congressional Review Act (CRA)?

    The CRA allows Congress to review and potentially disapprove of regulations issued by agencies like the IRS. This means that if the incoming Congress decides to take action, they may be able to overturn these new regulations.

    DeFi Broker Definition and Implications

    The DeFi broker definition encompasses platforms performing intermediary functions in facilitating transactions. According to Miles Jennings, general counsel of a16z Crypto: "the rule represents ‘a fantastical expansion of the words ‘effectuate transactions’ to enable the IRS to ban DeFi.’"

    Miles Fuller, director of government solutions at TaxBit, explained that the definition covers any provider that knows "or is in a position to know whether the nature of the transaction involved gives rise to reportable gross proceeds from the sale of digital assets." However, there are two specific groups excluded from this definition: validation services and wallet software providers.

    Blockchain Association Response

    Advocacy group Blockchain Association has called the rule "a final attempt" to send the US crypto industry offshore. A statement by the group’s CEO, Kristin Smith, said: "On behalf of the industry, we’re prepared to take aggressive action to fight back. We also look forward to working with the new pro-crypto Congress and Administration to roll back this and other anti-innovation rules."

    Impact on Taxpayers

    According to the IRS, these regulations are expected to affect as many as 2.6 million taxpayers.

    Why These Regulations Matter for DeFi Protocols

    The implications of these new regulations for DeFi protocols are far-reaching. With up to 875 DeFi brokers affected, this could have a significant impact on the industry’s growth and development.

    Background on IRS and Cryptocurrency Regulations

    The US Internal Revenue Service (IRS) has been actively working on regulating cryptocurrency transactions since 2014. In 2020, the IRS issued new guidelines for reporting gains or losses from cryptocurrency trading. This move aimed to bring clarity and transparency to the industry.

    However, with these latest regulations classifying DeFi protocols as brokers, there are concerns that this could lead to over-regulation and stifle innovation in the industry.

    Future of Cryptocurrency Regulations

    As we look forward to the future of cryptocurrency regulations, it’s essential for lawmakers and regulatory bodies to understand the complexities and nuances of the crypto industry. The new pro-crypto Congress may have an opportunity to roll back these regulations via the CRA process next year.

    Conclusion

    The new IRS regulations classifying DeFi protocols as brokers have sparked a widespread backlash within the crypto industry. With up to 875 DeFi brokers affected, this could have significant implications for the industry’s growth and development.

    Industry experts are calling for action from the incoming Congress to overturn these regulations. It remains to be seen how this will play out in the coming months.

    Additional Resources

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